News | December 27, 2013

Spain Approves New Power Transmission, Distribution Laws

Spain's government said Friday it had approved two new laws designed to reduce costs and increase the control and efficiency of power transmission and distribution.

The new Laws come on the back of an overarching law for the sector passed last week with a principal aim to eliminate the accumulated approximately Eur30 billion ($41B) shortfall between regulated income and expenditure, known as the tariff deficit.

"The modification will look to reduce costs, make the system more efficient and includes periodic review measures with the aim of creating the lowest possible price for electricity," the Industry, Energy and Tourism Ministry said in a note.

Among the new measures are stricter control and auditing of assets, a new incentive for distributors to combat fraud, and a cap on annual spending which will be carried out in conjunction with regional government.

Small distributors will be given a three-year timeframe to adapt to the new norms, the ministry said.

Last week, Spain was forced to invalidate its regular quarterly CESUR auction, used to determined domestic tariffs for the upcoming three months, amid accusations of manipulation of the process.

On Thursday, the government was advised by the competition watchdog CNMC to use a trailing three-month or six-month price formula to calculate the tariffs, which would increase by either 2.9% or 1.4%, depending on which method is used.

If the auction result had been held valid, prices looked set to increase by around 11% on January 1. The government said earlier this year it would look to reform the current wholesale 'pool' system in 2014, in order to adapt to the new marketplace which has a larger weight of renewable generation and an overcapacity of gas-fired plants.

The country, despite already passing several laws over the last two years, is still facing a deficit of an estimated Eur3.6 billion in 2013.

New Methodology
Friday's new Laws, which will be approved by Royal Decrees, establishes a methodology for investment in transmission infrastructure, the ministry said.

The methodology will guarantee a 'reasonable return' for investment, while looking to reduce financing costs, it said. It will include incentives to increase efficiency and availability of transmission networks, it added.

In detail, the return on invested capital of assets already in operation will be fixed at a 200 basis point premium to the country's sovereign 10-year debt, equivalent to a return of 6.5% at the present rate. There will also be incentives and penalties depending on the availability of the installations. Besides that, the government will offer incentives to extend the active lives of a number of assets, it said, without elaborating.

The new Law will also introduce new efficiency criteria for construction, operation and maintenance of transmission assets. Furthermore, cost overruns of projects will be limited to 25% above budget, the government said, while payouts for the approved assets will be delayed for between one and two years.

The 6.5% return on investment will also be introduced for the distribution market, the ministry said. Distributors will also be incentives to reduce fraud and improve the quality of supply. Overall, all transmission and distribution companies will have to present the ministry with annual and multi-year investment plans for approval.

The Energy Secretary will cap investment for each company with a global limit of 0.065% of national gross domestic product for transmission and 0.013% of GDP for distribution. Any regional overspends will not be absorbed by the nationwide power tariff, the Ministry added.

SOURCE: Spain's government